The 3 things you must research before investing

The 3 things you must research before investing

It is important under current market conditions that property investors stay calm and do not get caught up in the hype. Here's what you need to know before you buy.

Blogger: Victor Kumar, Right Property Group

In 2015, activity in the property markets in Sydney and Melbourne in particular has got off to a spectacular start – encouraged to a great extent by the early cut in interest rates and continued affordability of borrowing. In Melbourne, CoreLogic RPData reports 1,149 auctions were scheduled for the second weekend in March, 64 more than for the same time last year. Clearance rates have been consistently above 70 per cent. In Sydney, we are hearing reports of even hotter markets as buyers face strong competition in the frenzy to jump into an escalating market that has pushed the median house price to $900,000!

It is important, under current market conditions, that property investors stay calm and do not get caught up in the hype. The main way to do this is to research markets and conduct your due diligence on properties thoroughly. Three areas of research that can help you make reasoned decisions are:

INFRASTRUCTURE RESEARCHIt is important to invest in an area that has potential to affect capital growth in your property. Such areas have growing populations, strong employment opportunities and a council that is investing in infrastructure for the long term. Even if an area is buzzing with market frenzy, if your research shows that it doesn’t meet these criteria, then it is probably not a good place to invest. Hype cannot overcome the consequences of industry closing down, families moving away and a council that is short-sighted and reluctant to invest in local infrastructure.

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RIPPLE EFFECT RESEARCHOf course, sometimes a buoyant market can lead you to research an adjoining suburb or area that is yet to get caught up in the hype. This is known as the ripple effect. The next suburb to a ‘hotspot’ is still close to all the amenities and attractions, just a few kilometres further away. It may be that you need to cast your net wider when your research finds a good investment area but buyer frenzy is making the properties overpriced. Don’t give up on this area completely, just move a little further outside of it. A good way to find a quieter market is through the realestate.com.au ‘buyers on the market’ data. In each suburb it reports the numbers of buyers looking at each property on the market. If these numbers are high, move on (but not necessarily too much further on!).

VACANCY RATE RESEARCHRemember that as an investor, capital growth is important but so is cash flow. A vital part of your research should be vacancy rates and rental returns. When a market is too hot, and competition is pushing prices higher, it’s very sobering to crunch the numbers. What is the rental return as a percentage of your purchase price? Is there an oversupply of rental property in the area and therefore a strong possibility that you will experience extended periods without a tenant, and be forced to reduce rents to compete for the dwindling tenant pool? This area of your research must not be overlooked.

Don’t allow the hype in a heated property market to lead you to take shortcuts. When interest rates go up (as they eventually will) you don’t want to be holding property that you overpaid for and can no longer afford to keep.

About the author

Victor Kumar is the author of 'Supercharge your Property Portfolio' and the founding director of Right Property Group.

Victor and his wife came to Australia from Fiji in 1997 with just $4,500 in their pockets. They worked hard as radiographers but realised this was not the way to prosperity. Victor embarked on a process of building wealth through property. He has amassed a substantial property portfolio, and is still actively buying and renovating property. His recommendations are based on what works in today’s market, not what used to be effective a year or more ago.

Victor’s experience, finance background, and financial planning qualifications mean he is well equipped to negotiate with banks – helping them find ways to say “Yes”. He has also invested significant time and money in learning from other property investment experts and knows how to make a portfolio work.

Of course, Victor has made a few mistakes along the way but these have made him wiser – and he’ll let you learn from his mistakes so you don’t need to make them. His goal is to help you achieve your financial goals by sharing his extensive knowledge about financial structures and investment property.

Victor is now sought after as a keynote speaker at several property investment seminars and is acknowledged by his peers as an expert in the industry.